Thursday, February 28, 2013

Changing the way Medicare and health plans pay provider organizations is necessary but not sufficient to support higher-value healthcare delivery. The compensation system for the individual physicians and other healthcare professionals who work in those organizations also has to change. Most physician compensation systems today, even for physicians who are “on salary,” are based on fee-for-service, i.e., the physician gets paid in part or in whole based on the number of visits they have or the number of procedures they perform. If this compensation structure continues when the provider organization begins being paid under a new payment model, the physician will be penalized for reducing unnecessary visits and procedures even though the provider organization would be rewarded, and the physician will be rewarded for higher volume even if it hurts the provider organization’s bottom line. It is difficult to imagine that Accountable Care Organizations can be successful if all of their member providers are still being based using fee-for-service.

Clearly, if payment systems are changed to reward value rather than volume, the compensation of individual physicians and other providers will also need to be changed to align with the structure of the new payment system, rather than with fee-for-service payment. Rather than primarily basing compensation on “productivity,” physicians will need to be compensated based on factors such as quality, teamwork, and overall cost-effectiveness that will determine the provider organization’s success under the new payment system.

However, it is difficult for a provider organization to change its physician compensation system if only a subset of its payers have implemented payment reforms. The factors that determine financial success under fee-for-service are, by definition, different from the factors that will determine success under new payment models, but if physicians are going to change the way they practice, they will do that for all of their patients, not just those covered by a particular payer. If the majority of patients are not covered by reformed payment systems, the provider organization will be penalized for changing its compensation system, but if it doesn’t change its compensation system, its ability to succeed financially in caring for patients covered under the new payment system will be limited. In short, trying to manage patient care under multiple payment systems can create a serious Catch-22 for physicians and their practices.

Aligning physician compensation with new payment systems can also be challenging because of federal and state laws designed to prevent fraudulent or abusive conduct under current payment systems. For example, the federal Civil Monetary Penalty statute imposes financial penalties on hospitals that make payments to physicians as an inducement to reduce or limit services to Medicare or Medicaid beneficiaries. The law has been interpreted by the Office of Inspector General at the U.S. Department of Health and Human Services as prohibiting such payments even if the services being reduced are not medically necessary or appropriate. Consequently, gain-sharing programs designed to share savings with physicians when unnecessary services are eliminated could make a hospital liable for civil money penalties, as well as putting it in violation of the federal Anti-Kickback statute and the Stark law.

Congress has recognized that changes in fraud and abuse statutes will be needed in conjunction with new payment models. The federal Affordable Care Act authorizes the Secretary of Health and Human Services to waive these statutes in conjunction with the Medicare Shared Savings Program and projects undertaken by the Center for Medicare and Medicaid Innovation. However, providers may be reluctant to revamp their compensation systems based on these kinds of temporary waivers. Permanent changes to the fraud and abuse statutes are needed if payment reforms are to be successful. In states that have enacted statutes similar to the federal laws, state legislatures will also need to make comparable changes.

Friday, February 15, 2013

Two recent reports highlighted the growing consolidation of both health plans and hospitals across the country:

The 2012 edition of the AMA’s report Competition in Health Insurance: A Comprehensive Study of U.S. Markets found that 70 percent of the 385 metropolitan areas included in the study lacked health insurer competition. “It appears that consolidation has resulted in the possession and exercise of health insurer monopoly power,” the study notes, pointing to increased premiums, watered-down benefits and insurers’ growing profitability as evidence that highly concentrated markets harm patients and physicians.

Escalating hospital consolidation is leading to higher prices for services, and its impact is being felt by consumers and employers who are footing the bill, according to an amicus brief filed by America’s Health Insurance Plans (AHIP) in the Court of Appeals for the Sixth Circuit in support of the Federal Trade Commission (FTC). “Experience demonstrates that hospital consolidation results in higher prices for medical services and higher health care costs for consumers and employers,” said AHIP President and CEO Karen Ignagni.

Which is the bigger problem — too few health plans or too few hospitals?

In a typical economic market, the more sellers of a particular product or service there are, the lower prices will be, because the sellers will compete on price in order to attract customers. This has led many people to believe that the way to get lower health insurance premiums is to have more health insurance companies competing to sell insurance in a state or region.

However, it’s not quite as simple as that, because health insurance companies are not only sellers of insurance, they’re also the buyers of our healthcare services. They negotiate with hospitals and physicians to set the prices paid for the services individuals and employers receive when they buy a health insurance policy. The more that health plans have to pay for hospital care, the more a health insurance plan will cost. And simple economic theory tells us that, all else being equal, bigger health insurance plans have more clout to negotiate lower prices for healthcare services than smaller plans do.

Most people experience this every day in retail. Consumers don’t buy goods directly from manufacturers; they buy them from retail stores. Does having more retail stores result in higher or lower prices for consumers? Big retailers like Walmart or Target can usually buy products from manufacturers for a lower price than smaller retail stores can, and so they can sell the products to consumers for less. If there were only one big retailer, consumers would probably see higher prices, because the monopoly retailer could keep the price discounts for itself in the form of higher profits. But conversely, if there were only small retailers, prices for consumers would probably also be higher, because those retailers couldn’t negotiate large price discounts from manufacturers.

What consumers pay depends not just on the number and size of retailers, but on how much competition there is among manufacturers of the product. For example, if there were only one company that manufactured televisions, it wouldn’t matter how many TV retailers there were or how big they were, because a monopoly television manufacturer could set the price as high as it wanted, and both the retailer and consumer would have to pay more to get a TV.

Just like retailers, health insurance companies sit in between the producers of healthcare services –hospitals and physicians – and the ultimate consumers of those services, i.e., patients. The more health plans there are, the smaller each of them will be, and that means they’ll have to pay higher prices to health providers, particularly big hospital systems. It also likely means the health plans will have higher administrative costs as a percentage of healthcare costs, since smaller health plans will have fewer economies of scale. Both of those things will push insurance premiums up. The only thing that competition among the health plans will reduce is their profits.

On balance, having more health plans will be more likely to increase premiums than to reduce them. Under the federal Affordable Care Act, health plans can only retain 15-20% of their premium revenues for administrative costs and profits; the remaining 80-85% must be spent on health care services and quality improvement activities. Even if greater competition among health plans resulted in, say, a 25% reduction in their administrative costs and profits, that would reduce premiums by at most 5% (i.e., 25% of the maximum 20% of premium that can be spent on non-medical expenses), whereas if bigger health plans could negotiate a 10% larger discount on the prices paid to healthcare providers, that could reduce premiums by 8% or more (10% of the minimum 80% of premium that’s devoted to medical expenses).

In fact, research indicates that having more health plans increases the prices paid for healthcare. For example, a 2010 study by Carnegie Mellon Professor Martin Gaynor and colleagues found that having five health insurers in a region instead of four would increase hospital prices by 7%, and a 2011 study by University of Southern California Professor Glenn Melnick and his colleagues found that hospital prices in markets with more health plan competition were 13% higher than in markets with a small number of large health plans.

It’s important to note that what counts is not the total size of the health insurance company, but how many people it insures in the local region, i.e., its local market share. When large national insurance companies enter a market, they may offer lower premiums than existing health plans, but it’s probably not because they’re getting lower prices from hospitals; it’s more likely that they’re just setting their prices below their costs in order to build their business, and paying for those discounts by charging higher premiums in other regions.

Unfortunately, although bigger health plans may be able to pay lower prices for healthcare services, fewer health plans also means less competition among health plans, and so consumers and employers may be less likely to receive the benefits of any lower prices the health plans pay providers. In addition, bigger health plans can also unintentionally encourage the creation of large, monopoly health systems. Since big health plans can demand bigger price discounts from smaller hospitals and physician practices than from large systems, small providers may be forced to either go out of business or merge with the large systems. This is a problem because of the growing evidence nationally that high healthcare costs are being caused by the high prices demanded by large, consolidated health systems. For example, research by University of California Professor James Robinson found that in markets where there were fewer hospital systems, prices were 13%-25% higher for a range of cardiac and orthopedic procedures.

The solution to high healthcare costs isn’t to change the number or size of health plans. The solution is to completely change the way we pay for health care:

Hospital systems should be expected to compete on both cost and quality. Instead of secretly negotiating prices with health plans, they should make both their prices and quality measures public, charge the same price to all patients regardless of the type of insurance they have, and offer warranties on their care. For example, the Geisinger Health System in Central Pennsylvania now offers cardiac surgery, maternity care, and a number of other procedures for a single, total price, and they don’t charge extra when errors or complications occur.

Patients need to take responsibility for comparing hospitals on both their cost and quality, and to pay more if they choose expensive hospitals when other hospitals offer high quality care at a lower cost. For example, Massachusetts Blue Cross Blue Shield is asking patients to pay higher copays when they choose higher-cost hospitals.

What we need from health plans is for them to implement new payment systems and benefit designs that support effective competition by providers and more value-based choice by patients. Instead of trying to get more health plans in a state or region or asking them to compete on the size of discounts they can extract from providers, employers should be choosing the health plans that will support a rapid transition to higher-quality, lower cost healthcare.

Wednesday, February 13, 2013

Many providers have been reluctant to accept episode-of-care payments and global payments because of concerns about their ability to manage significant financial risk. Patient advocates may also oppose payment reforms that create financial risk for providers because of a fear that if providers take on responsibility for controlling costs, they will stint on services that patients need or avoid patients with significant health problems.

Although this barrier has typically been framed in terms of how much risk providers can take, the real issue is what type of risk providers can and should take. If episode payments and global payments are structured in ways that give providers accountability for costs they can successfully manage, then providers will be more willing to accept them; conversely, if a payment system demands that providers take accountability for costs they cannot control, then the providers will either be unwilling to accept the payment system or, if they do, they could risk financial problems, which is what happened to many providers under capitation contracts during the 1990s.

There are two key ways to structure payments so that they give providers only the types of financial risk they can manage:

Separating Insurance Risk and Performance Risk. First, a payment system should be structured so the payer retains the “insurance risk” (i.e., the risk of whether a patient will develop an expensive health condition) and the provider accepts the “performance risk” (i.e., the risk of higher costs from delivering unnecessary services, delivering services inefficiently, or committing errors in diagnosis or treatment of a particular condition). Many of the problems with managed care in the 1990s arose because traditional capitation payment systems transferred both insurance risk and performance risk to providers, causing bankruptcies when providers took on care of many sick patients without any increase in payment.

Focusing on Costs That a Provider Can Control. Second, a payment system should give a healthcare provider accountability for the types of services and costs that the provider can control or significantly influence, but not for services and costs over which the provider has little or no influence. For example, primary care physicians are in a much better position to determine the appropriateness of services they prescribe than health plans are, so building accountability for utilization of prescribed services into physician payment is better than trying to control utilization through prior authorization and utilization review programs operated by health plans. On the other hand, a payment reform system that only gives primary care physicians a bonus if there are reductions in the total cost of all services their patients receive from all providers goes too far in shifting accountability, since primary care physicians do not control all of the factors that drive the total cost of care for their patients. (For example, assume that a primary care physician is able to significantly reduce the rate at which his or her chronic disease patients are admitted to the hospital for exacerbations of their chronic condition; if the subset of patients who are still admitted to the hospital develop serious infections or complications, total costs might increase, even though the primary care physician had been successful in controlling the aspect of utilization that he or she could influence.)

There are several ways to structure payment systems to give providers accountability for the costs they can control, without putting them at risk for costs they cannot control:

Risk Adjustment

A common way to protect providers from insurance risk is to make higher payments for those patients who have more health conditions or more serious health problems, i.e., to “risk-adjust” payments. For example, in the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract, provider organizations receive a budget based on the number of patients they care for, but the budget is increased if the patients have more health problems, so the providers are accepting only performance risk, not insurance risk.

Some payers have raised concerns about using risk adjustment as part of a payment system because a patient’s risk score tends to increase as soon as they become part of a risk-adjusted payment system, and this can cause overall spending to increase rather than decrease. This happens because, under fee-for-service payment, the diagnosis codes used for risk adjustment are only recorded when a related claim for treatment is filed; as a result, many health conditions are not recorded in health plans’ claims data systems (particularly if patients have recently changed health plans). However, under a risk-adjusted payment system, the provider has an incentive to do complete coding of diagnoses, not just to ensure accurate payment, but to ensure that all of the patient’s health conditions are being managed in a comprehensive and coordinated way. Rather than eliminating risk adjustment entirely to avoid this artificial increase in risk scores (which could thereby discourage providers from taking on sicker patients), risk adjustment systems should be modified so that both the baseline risk score and current risk score are changed when a patient’s pre-existing condition is identified and documented. Broader use of electronic health records will help to address this problem by enabling risk adjustment to be based on complete clinical data on the patient’s past and current patient health conditions, not just on data recorded to support recent claims for payment to a particular health plan.

Current risk adjustment systems also need to be improved so they do not penalize providers for keeping their patients well. A patient’s risk score is typically based on the health problems that a patient has today, not on how those problems have changed as a result of the health provider’s care. So, for example, if a physician helps a patient lose weight or stop smoking, the patient’s risk score would decrease, and as a result, under a risk-adjusted payment system, the physician would receive a lower payment than if the patient had remained unhealthy, thereby penalizing the physician for a successful health improvement effort. Improved risk adjustment systems that capture such changes over time will be needed, particularly if more providers and payers sign multi-year contracts to manage healthcare cost and quality.

Risk Limits

At best, risk adjustment is only a partial solution; no formula could ever be 100% accurate in predicting legitimate variations in costs, simply because of the myriad factors that can affect patient costs and outcomes. To adequately protect both providers and patients, risk adjustment should be supplemented with risk limits, such as:

Outlier payments to cover unusually high costs for specific patients.

“Risk corridors” that require payers to provide additional payments to providers when the total cost of treating a group of patients significantly exceeds the agreed-to payment level. The sizes and cost-sharing parameters for these risk corridors could vary from provider to provider, since larger providers will be better able to manage variation in costs, and the parameters could also be changed over time as providers become more experienced in managing costs.

Risk Exclusions

In some cases, it is clear that certain kinds of costs cannot reasonably be controlled by a provider, and rather than using risk adjustment formulas or other complex calculations to adjust for this, these costs (or the situations that lead to them) should simply be excluded from accountability altogether. For example, the costs associated with patients who are seriously injured in accidents could simply be excluded entirely from a global payment model for a small group of physicians, and be paid for separately on an episode-of-care basis or under traditional fee-for-service.

In other cases, as noted earlier, a provider may be able to control certain aspects of a patient’s healthcare costs but not others. Healthcare providers are far more likely to be willing to accept responsibility for the utilization and cost of services they deliver or prescribe themselves than services chosen by other providers. (For example, primary care providers can influence the rate at which their patients go to an emergency room, but not the number of tests that are ordered once the patient arrives; emergency room physicians can influence the number of tests ordered in the emergency room, but not how many patients come to the emergency room for conditions that could have been treated by their primary care provider.) To address this, payment to physicians in a particular specialty can be designed to only include the costs of the services that these physicians can control or significantly influence, while excluding the costs of other services. (The payer would continue to pay for the excluded services on either a fee-for-service basis or through separate payment reforms designed for the other specialties). In some cases, one provider may be willing to take accountability for whether a patient uses a particular service delivered by another provider, but not for the price of that service, particularly if the provider of the service is in a position to negotiate high prices or increases in prices; this can be addressed by making the accountable provider responsible for the utilization of the services, but excluding accountability for increases in the price of the services.

Providers will also be better able to accept accountability for controlling costs if their patients are supporting their efforts. If a provider does not know until after the fact who their patients are, or if the patients’ insurance benefits do not give them the ability and incentive to help the provider change their care in ways that will improve quality and lower cost, then the provider may be unable to control some of the key factors that are driving increases in costs. If the patients’ benefit structure cannot be changed to support a provider’s ability to control certain aspects of cost, then all or part of those costs could be excluded from accountability under the payment model. (For example, if some patients spend part of the year living in another part of the country, but their health insurance will pay for them to receive elective procedures while they are away, the designated provider in their home community might only be expected to control costs of care during the time the patient is actually resident in the local community, rather than all of the costs incurred by those patients during the entire year.)

Arbitrated Contract Adjustments

It is impossible for anyone to predict exactly what will happen when payers and providers move to completely different payment models. New drugs, new medical devices, and new ways of delivering care are being developed at a rapid pace, and these can either help or hurt providers’ ability to control costs and improve quality. It is not surprising that there are typically long delays in negotiating payment reform contracts, since both payers and providers will try to anticipate all possible contingencies and incorporate provisions covering them in the contracts.

This problem will be exacerbated with multi-year contracts. Multi-year contracts between payers and providers provide a better opportunity for providers to make changes in care delivery that take time to implement and to reap returns on investments in preventive care and infrastructure, and they give payers greater ability to control the trend in healthcare costs (for example, the Alternative Quality Contract developed by Massachusetts Blue Cross Blue Shield is a five-year contract that was designed to slow the growth in spending rather than achieve immediate savings). However, the longer the contract, the greater the potential for unexpected events to occur, the greater the difficulty of building appropriate protections into a contract to deal with those unexpected events, and the greater the reluctance providers and payers will have to sign.

A solution to this is simply to acknowledge that unexpected events may occur and to provide for opportunities to make adjustments in the contract to deal with them. Of course, the party which is disadvantaged by the unexpected event will be more interested in making an adjustment than the party which benefits from it, so the contract could provide for having a neutral arbitrator resolve any disagreements.

Wednesday, February 13, 2013

Even though the serious problems with fee-for-service payment have been widely acknowledged, many “payment reforms” do not change fee-for-service payment at all, but merely add new forms of pay-for-performance bonuses or penalties on top of it. Trying to fix a broken system merely by adding a new layer of incentives can be problematic for physicians, hospitals, and other healthcare providers, so it is not surprising that to date, acceptance of these types of payment changes has been slow, and where they have been implemented, the impacts on cost and quality have often been relatively small.

The Many Problems with “Shared Savings”

The most common payment change being implemented by Medicare and many commercial health plans today is “shared savings.” Under the shared savings approach, Medicare or the health plan pays providers using exactly the same fees as they receive today for their services, and then pays a bonus (or imposes a financial penalty) on the providers if the total cost of services for their patients is less than (or greater than) the amount that would otherwise have been expected.

The fact that shared savings programs do not actually change the underlying fee-for-service system creates significant challenges for providers. For example:

Today, Medicare and most health plans pay physicians only for office visits, not for phone calls. If a physician can respond to a patient’s health problem over the phone, thereby avoiding the need for the patient to make a visit to the office, the physician will lose revenue. Reimbursing the physician for a portion of the lost revenue through a shared savings program still penalizes the physician’s practice (recouping only a portion of the loss still results in a loss) and also creates a cash flow problem, since shared savings payments typically aren’t made until a year or more after the losses occur.

If better coordination of a patient’s care can avoid an emergency room visit or hospital admission, the hospital will lose all of the revenue for that visit or admission, but it will still have to cover the costs of having the emergency room or hospital bed available. Giving the hospital a bonus or shared savings payment for lower admission rates can still penalize the hospital, since the portion of the lost revenues offset through the shared savings payment may be less than the fixed costs the hospital must continue to cover.

Having two or more providers participating in a shared savings arrangement creates a version of the prisoner’s dilemma: if provider #1 makes a good faith effort to reduce unnecessary services but provider #2 does not, provider #2 would “win” by maintaining its own fee revenues while also potentially receiving part of the savings generated by provider #1. If provider #2 increases its volume of services, it would receive more revenue and also thwart the opportunity for provider #1 to receive any shared savings to offset the revenue it lost.

The shared savings model is biased against hospitals which do not employ physicians, since under the most common shared savings approach, all savings are credited to the organizations where the patients’ primary care physicians work, even if the savings are generated through improved care or reduced utilization in the hospital. Forcing hospitals to solve that problem by acquiring physician practices may simply lead to higher prices, not lower costs.

Another serious problem with the shared savings model is that once the shared savings contract between the payer and provider ends, any shared savings bonuses will also typically end; providers will still be in the same fee-for-service system they had before, but they will now have lower revenues if they have reduced the volume of fee-based services in order to obtain shared savings payments, and they may also be receiving lower fee levels for individual services if payment cuts are being made through other policies, such as the federal Sustainable Growth Rate formula. In order to obtain continued shared savings payments in the future, a physician or hospital would have to find new sources of savings. Providers may be unwilling to significantly change the way they deliver care or invest in better ways of delivering care if they can only reap the benefits of savings for a few years.

Some payers have made modifications to the payment system to try and address some of these problems, but in general, the modifications have not changed the underlying fee-for-service payment system in any fundamental way. For example:

Many medical home payment programs provide a small, flexible, non-visit-based payment to primary care physicians to help them cover the costs of services that are not reimbursed directly through fees. Although these additional payments are highly desirable and address some of the problems of fee-for-service payment, in most cases, the vast majority of the physicians’ revenue continues to come from visit-based fees. Moreover, the amount of non-visit-based payment the practice receives in these programs may depend on how many fee-generating visits its patients make to the practice, which means that fee-for-service still represents the dominant incentive.

The CMS Innovation Center created an Advance Payment Program that makes upfront payments to small provider organizations that want to participate as Accountable Care Organizations in the Medicare Shared Savings Program. These payments are very helpful, but they are only temporary, and they can only be used to help pay for the costs of new infrastructure or personnel, not to cover revenue losses the provider incurs due to changes in the way they deliver services that reduce fee-for-service payments.

Implementing True Payment Reform

True payment reform cannot be achieved by adding new layers of bonuses and penalties on top of what is still fundamentally a fee-for-service payment system. Moreover, to be successful, a new payment system needs to be more attractive for providers than fee-for-service payment, not less, while still reducing costs for payers and improving quality for patients.

For most types of patients and health conditions, fee-for-service payment must be replaced entirely with a new payment system that gives providers (a) greater flexibility to deliver the best combination of services for the patient, and (b) the accountability to ensure the combined cost of those services is less than the payment amount (along with the ability to retain any additional savings generated indefinitely).

Examples of such better payment systems include:

“Episode-of-care” payments for acute conditions or procedures that give a healthcare provider a payment or budget to cover the costs associated with all of the care a patient needs for that condition or procedure. Under this type of payment system, the provider has the flexibility to decide which services should be provided. If the patient’s condition can be managed with fewer individual services or by substituting different services than are delivered today, the payment would remain the same, even if fee-based revenues would have declined, but costs will be lower. As a result, payers will save money, while providers can actually improve their operating margins.

“Global” payments or condition-specific comprehensive care payments for overall management of patients’ healthcare that give a healthcare provider a payment or budget for the costs associated with all of the care a group of patients need for all or some of their health conditions. The provider has the flexibility to choose the combination of services which will best help the patients address their healthcare needs, but the provider also has the accountability to ensure that the costs of all of those services remain within the global payment or budget amount.

Where these approaches have been used, both providers and payers have benefited. For example, in the Medicare Acute Care Episode (ACE) Demonstration, which “bundles” physician and hospital payments (i.e., it makes a single payment to both providers, rather than separate payments to each), Medicare has saved money, physicians have received higher payments, hospitals have been able to reduce their costs and improve their operating margins, and patients have received better care. The positive results from this program led the CMS Innovation Center to create its Bundled Payments Initiative, which will both allow additional providers to participate in the bundling approach used in the ACE Demonstration and allow providers to accept full episode payments for a variety of conditions. This win-win-win approach – lower spending for payers, better care for patients, and better margins for providers – is only feasible with the types of significant payment reforms described above, not with minor tweaks to the fee-for-service payment system.

Some payers have begun implementing these kinds of true payment reforms. For example, in addition to the CMS Bundled Payments Initiative, the Integrated Healthcare Association in California has created episode payment definitions for a number of different procedures that are being implemented by several different health plans and providers, and the Health Care Incentives Improvement Institute is implementing episode payments with providers and payers in several different markets. Blue Cross Blue Shield of Massachusetts has implemented the Alternative Quality Contract, which gives a group of providers a risk-adjusted global budget to cover all of the costs of care for a population of patients. In Medicare’s Pioneer ACO program, providers will move from shared savings to partial or full global payments in the third year.

However, much faster progress is needed in more parts of the country. All payers need to make episode and global payments available to providers for as many types of patients and conditions as possible, as soon as possible.To be successful, though, these payment systems need to be structured appropriately to give providers accountability only for the costs they can control, and they need to be accompanied by appropriate benefit designs. If payment reforms are designed properly, there will be no need to mandate them; many providers will voluntarily accept a payment system that gives them the flexibility to deliver the best care to their patients and rewards them for high-quality care at an affordable cost without putting them at risk for costs they cannot control.